Imagine a day when you go to buy a quart of milk, ask the price, and the cashier says, “that’ll be a tenth ounce silver.” As the US dollar’s decline accelerates, several efforts around the country are trying to make this vision a reality.

Historically, paying for items in silver or gold was actually quite common. We happen to live in an unusual time and place where generations have grown up trading exclusively in paper. While my parents still used dimes made of silver, we have now gone several decades with no precious metals in any of our official coinage. But this system of money by government fiat is unsustainable.

While the practice of bartering precious metals directly for goods and services has continued on a small-scale over the last few decades, the 2000s saw the beginning of organized efforts to revive gold and silver as money.

This week, in the second in a series of less-than-impressive press conferences, Fed Chairman Ben Bernanke offered market observers little hope that any additional quantitative easing programs are on the horizon. The Chairman continues to cling to the position that the economy is improving (with the recent “soft patch” attributable to external forces) to the extent that additional Fed support will be unnecessary. Left unsaid was any guidance as to who the Chairman believes will buy the massive amounts of Treasury debt formerly swallowed up by the QE II program?

The logical conclusion is that Bernanke believes that there will be massive private sector demand for U.S. Treasury securities. If so, how long can it be expected to last? If the economy improves, as Bernanke expects, would it not be logical to assume that private investors would direct capital to more promising sectors than ultra low yielding U.S. sovereign debt? Clearly something does not add up. Judging by the Chairman’s halting delivery and sheepish demeanor, it appears as if he knows his position is untenable.

This week saw the type of downside volatility in the precious metals market that will be remembered for years to come. For those of us who have been long gold, and silver in particular, the memories will not be pleasant. While many had been expecting a pullback in silver, when the violence did come it was nevertheless shocking. Silver shed one third of its value in less than one week. And while gold was pulled down by the general sell off in all commodities (oil, copper, coffee, etc.) the yellow metal shed only 6.5% during the carnage. Those mild losses should remind us that gold is not just another commodity, but has monetary qualities that tend to smooth out volatility. But will silver survive the vicious downturn?

I have worked on Wall Street my entire life, and one thing I’ve learned is that large institutional investors, like pension funds and endowments, rarely veer from the herd. They manage too much of other people’s money to stick their necks out alone – if their investments go bad, at least they can point to everyone else who fared just as poorly.

For this reason, these funds are often lagging in their perception of crucial market changes – changes such as a doomed currency. While many of us are buying precious metals to hedge against the collapse of the dollar, gold and silver have been taboo investments on Wall Street for years. Fund managers are taught that gold is a “barbarous relic” – much better to stick with government bonds and blue-chip stocks. That’s what everyone else is doing.

Despite loud huzzahs from a variety of boosters who proclaimed that Chairman Bernanke spoke with gravitas and wisdom at the first ever Federal Reserve press conference, the wider investing public clearly saw the performance as unconvincing. During and immediately after the proceedings the prices of gold and silver rose strongly to new highs as the U.S. dollar plummeted. The affair seemed to solidify the understanding that Bernanke and his cohorts have no intention whatsoever to reverse the current trend of inflation and a weakening dollar.

With all the preliminaries swept away, it appears that the great dollar slide that we have long feared will not be interrupted. In the last year alone, the dollar has fallen 25 per cent against the Swiss Franc, (the gold standard of fiat currencies) – with one quarter of that decline coming since the beginning of April alone. Against gold itself (the gold standard of all forms of money), the decline has been even worse, 31 per cent so far this year, and 8 per cent this month.

Ominously, the dollar index (the broadest measure of dollar strength) is just a percentage point or two above the all time lows that it set before the financial panic of 2008 sent spooked investors into the apparent safety of America’s deep and liquid Treasury market. It appears that spell has now been fully broken.

As a result of active “demonetization” efforts by the IMF and its member central banks, gold and silver have experienced the type of volatility that has given conservative investors reasons not to perceive the metals as dependable cash alternatives. Instead gold and silver have become known as the asset class to hold as a hedge against inflation.

However, during the 1990′s, when inflation was in general much higher than it has been since the turn of the millennium, gold and silver prices drifted lower and stagnated. However, since 2000, gold and silver have risen by over 400 and 700 percent respectively. Remarkably, this has occurred over a time frame during which, by most accounts, low inflation has prevailed. How can this be explained?

In 1944 when the U.S. dollar was considered ‘as good as gold,’ it was made the international reserve currency. This unique status is the reason that Fed Chairman Ben Bernanke was recently able to say that, “The U.S. Government has a technology, called the printing press that allows it to produce as many dollars at it wishes at essentially no cost.”

It is rare in recent history for precious metals to appreciate in parallel with the broader stock market. Yet, this has been the case in the two years since the stock market began crawling out of the wreckage of the 2008 financial crisis. Although metals have vastly outperformed US equities over that time frame, it is noteworthy that stocks have gone up at all. Since January 2, 2009, the S&P 500 stock index is up just about 50%. Over the same time, gold is up 68% and silver is up a staggering 267%. With rising interest rates, oil at over $100 a barrel, and the recovery running out of steam, many investors are wisely asking if the markets are set for a sharp pullback. Given the correlation that we have seen across asset classes, some are making the seemingly logical conclusion that metal prices are vulnerable.

The results of 2008 loom large in many calculations. In the second half of that year, when the extent of the financial catastrophe emerged into the light of day, the S&P 500 dropped some 31%. At the same time, gold dropped by more than 7% and silver almost 39%. Recent volatility in the shares of gold and silver mining stocks reveal that the fear of such reversals may be a growing concern among investors.

But one example does not a rule make, especially the example of a panic rush into dollars and US Treasuries. Wise long-term investors make decisions based upon fundamentals, and those for precious metals remain strong.

While gold and silver coins are nice to look at, and there’s a certain sense of independence one gets from owning them, most purchasers buy physical precious metals with the goal of eventually spending them.

As they say, you can’t take it with you.

Unfortunately, many purchasers buy without ever knowing how to spend, and that can cause problems down the road. The reason I say “spend” instead of “sell” is that selling your coins for dollars (or euros, yen, etc.) is only one way to spend them. The other is to barter directly for goods and services. Whichever method you choose, it’s important to know all your options.

SELLING BACK TO THE DEALER

Most legitimate bullion dealers will buy back what they sell you for a few percentage points less, depending on the product, amount, supply, and demand for that product at the time of repurchase. This is called the “spread.”

Earlier this month, J.P. Morgan made an important announcement that received scant coverage in the media: the bank would now accept gold as collateral for loans. The move appears to have been well-timed, for in the ensuing weeks, the price of gold and silver climbed steeply, based largely on political turmoil in the Middle East. But why should Morgan’s decision be of interest to anyone outside the bank?

It can be argued that J.P. Morgan is the world’s premier major bank. As such, its decision to accept gold as collateral offers a rare glimpse into the very private financial decision-making of some of the largest and most sophisticated investors in the world, whether governments, corporations, or wealthy individuals.

By reopening its former gold vaults in New York, as well as new facilities in Far Eastern financial centers – which cater to investors who typically have larger gold reserves than Western counterparts – Morgan is telling the world that gold is gaining greater traction as a medium of exchange.

Given that a bank continually looks to provide services that its clients demand, the move suggests that a strategy has taken hold among the highest echelon of investors based on core holdings of precious metals.

Last month, I addressed the hype around gold confiscation, and debunked the myth that collectible or numismatic coins would offer effective protection. But there is another sales pitch that many dealers will use while trying to “up sell” you to numismatics. They may argue that on investment merits alone, numismatics are a better bet. While this may be a more rational line of thinking than the typical confiscation con, it is bad advice for investors hoping to protect their assets in an economic slump.

THINK LIKE A PRO, NOT A SCHMO

I have long urged investors to keep 5-10% of their portfolios in physical precious metals, and add even more exposure when appropriate through the Perth Mint certificate program and mining stocks. This advice, far outside of the Wall Street mainstream, stems from my view of the kind of crisis we are approaching.

Many people assume that the crash I wrote about in the original “Crash Proof” was the credit crunch of October ’08. They are mistaken. Though I did accurately forecast the economic events of 2008, my ultimate prediction was that these events would set into motion a larger crash to follow. That crash, the one I have been warning about for a decade, is a collapse of the international dollar standard.

This is the crisis for which the smart money is already preparing. The People’s Bank of China, Reserve Bank of India, Goldman Sachs, Barclays Capital, John Paulson, Jim Rogers, and countless other big names are all protecting themselves from a global monetary breakdown by buying gold. But are they doing it with numismatics? Among the big players, the answer is universally no.